Question 1

The selection of a special order will improve net profit when the order's income exceeds:
A) the direct labour cost of the order.
B) the replacement cost of the order.
C) the incremental cost of the order.
D) the opportunity cost of the order.

Accepted Answer

The incremental cost of the special order is the additional costs incurred to produce the product, such as direct material and variable manufacturing overhead, and it does not include fixed overhead costs that have already been incurred. Therefore, if the incremental revenue from the special order exceeds the incremental cost, there is a net gain in profit. Choices A, B, and D are not as relevant to determining the profitability of a special order.

Question 2

Which of the following is not a relevant cost or benefit when determining a contribution margin?
A) Income
B) Cost of goods sold
C) Unavoidable costs
D) Net sales

Accepted Answer

Unavoidable costs are not relevant when determining a contribution margin because they are incurred regardless of the decision being made. Contribution margin analysis focuses on costs that vary with the level of production or sales, such as cost of goods sold and net sales, and not on fixed costs that cannot be avoided.

Question 3

The contribution is also known as the internal opportunity cost, and reflects the cost of using the resource within the organisation itself due to competing opportunities.

Accepted Answer

The statement accurately describes the concept of contribution/internal opportunity cost.

Question 4

An opportunity cost is the maximum benefit that could be obtained from a resource if it were to be used for some other purpose.

Accepted Answer

An opportunity cost is a concept in economics that refers to the value of the next best alternative that must be given up in order to pursue a certain action. In other words, it is the benefit foregone by choosing one option over another. Therefore, the statement is true.

Question 5

The potential to damage customer loyalty or employee morale is a qualitative factor that needs to be considered in decision analysis.

Accepted Answer

The potential to damage customer loyalty or employee morale can have a significant impact on the long-term success of a business, and therefore should be taken into consideration as a qualitative factor in decision making.

Question 6

A department generates income of $20 000 and has variable costs of $14 000 and avoidable fixed costs of $7500. This indicates that the costs directly attributable to the department exceed its income and the department should be closed.

Accepted Answer

The total costs (variable costs + avoidable fixed costs) are $21,500, which exceed the income of $20,000, indicating a loss and suggesting closure.

Question 7

Sunk costs are costs that have been incurred, or whose payment cannot be avoided; they are irrelevant to future decisions.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, and thus should not be considered when making future decisions.

Question 8

When making comparisons using relevant cost and benefit analysis with traditional analysis based on actual costs, the result will depend on the particular circumstances of the firm making the decision.

Accepted Answer

Relevant cost and benefit analysis takes into account only the costs and benefits that are relevant to the decision being made, whereas traditional analysis takes into account all actual costs regardless of relevance. Therefore, the result will vary depending on the circumstances and the factors being considered.

Question 9

Unavoidable costs will be incurred regardless of the decision made and are therefore relevant to decision making.

Accepted Answer

Unavoidable costs are not relevant to decision making because they will be incurred regardless of the decision made.

Question 10

Opportunity costs are economic measures and therefore not relevant to accounting decision making.

Accepted Answer

Opportunity costs are relevant to accounting decision making because they refer to the cost of choosing one option over another, including the potential benefits foregone from the rejected option. This information can be used in making informed decisions on investments, pricing, and resource allocation.

Question 11

James is considering replacing his worn-out machines. Which of the following is not a relevant cost for James when considering various available options?
A) Costs of electricity consumed by current machines
B) Changes in costs of labour needed to operate the new machines
C) Costs of delivering the new machine
D) Costs of replacing old machines

Accepted Answer

Relevant costs are those that will change as a result of a decision. The costs of electricity consumed by current machines are sunk costs and will not change with the decision to replace machines, making them irrelevant to the decision-making process.

Question 12

Fixed costs are irrelevant to a decision if they remain the same regardless of the decision.

Accepted Answer

Fixed costs do not change based on the decision being made, so they do not impact the decision-making process. Only variable costs and revenues that change with the decision need to be considered.

Question 13

Avoidable costs are those costs that will not be incurred if a particular decision is taken, therefore avoidable costs are relevant to decision making.

Accepted Answer

Avoidable costs are relevant to decision making because they can be eliminated or reduced if a particular decision is taken. Therefore, they are important to consider when making decisions.

Question 14

Incremental or differential costs are the increases in costs or benefits between alternative opportunities available to an entity.

Accepted Answer

Incremental or differential costs are the additional costs that an entity incurs or the benefits that an entity receives from choosing one alternative over another.

Question 15

In deciding whether to close a department or division, the general rule to follow is that if the department/division makes a positive contribution, then it should not be closed, where the contribution is at least equal or greater than the income less the variable costs.

Accepted Answer

This is the general rule to follow in deciding whether to close a department or division. If it makes a positive contribution, meaning the income is equal to or greater than the variable costs, then it should not be closed.

Question 16

In a situation where a division has variable costs and avoidable fixed costs, and these costs combined exceed income, then based only on the financials the division should be closed.

Accepted Answer

If the combined variable costs and avoidable fixed costs of a division exceed income, then the division is operating at a loss. Continuing to operate the division would only result in further losses, and therefore it would be financially wise to close the division.

Question 17

When there are resource constraints, the objective that should be applied is to establish the optimum output within the constraints to maximise contribution and thus profits.

Accepted Answer

When there are resource constraints, the objective should be to utilise those resources efficiently and effectively to generate maximum output within the limits. This will lead to maximising contribution and increasing profits.

Question 18

Relevant costs are those costs that relate to the future and are additional costs that will be incurred or result from a decision.

Accepted Answer

Relevant costs pertain to the future and would change as a result of a decision, whereas irrelevant costs have already been incurred or will not be affected by the decision.

Question 19

Sunk costs are:
A) costs of replacing an item today.
B) costs incurred and no longer recoverable.
C) costs of an item discounted at an appropriate rate.
D) equivalent to the historical cost of an item.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, regardless of future actions or decisions. They are considered irrelevant to decision-making because they cannot be changed or reversed.

Question 20

Where an entity faces resource constraints, the appropriate selection of what to produce should be based on the contribution per unit of resource constraint, as this will optimise output and profits.

Accepted Answer

When facing resource constraints, it is important to allocate resources to the most profitable activities. By selecting what to produce based on the contribution per unit of resource constraint, the entity ensures that it is maximizing output and profits with the limited resources available.

Quiz 17: Accounting for Decision Making: With and Without Resource Constraints

The selection of a special order will improve net profit when the order's income exceeds:

Which of the following is not a relevant cost or benefit when determining a contribution margin?